**EXHIBIT 22**The inside front cover and pages 10-18 and 19-35of the Annual Report to Security Holders for thefiscal year ended May 31, 2005 are appended hereto as Exhibit 22 hereof and are beingelectronically filed with this Form 10-K Annual Report.
Exhibit 22

 
**FINANCIAL HIGHLIGHTS**                       May 31,(in thousands, except per share information) **2005**  2004  2003  2002  2001  Revenues **$****107,616**  $94,110  $108,796  $147,864  $211,176  Costs of revenues and depreciation  **45,862**   44,778   62,663   81,678   99,724 Selling, general and administrative expenses  **29,869**   32,207   37,399   50,492   62,625 Loss on impairment of goodwill and intangibles  **—**   —   37,135   —   — Interest and other, net  **(3,234****)**  (1,335)  (4,091)  (2,232)  (708) Income (loss) before income taxes  **35,119**   18,460   (24,310)  17,926   49,535 Income tax provision (benefit)  **10,854**   6,476   (9,324)  4,804   17,316  Net income (loss) **$****24,265**  $11,984  $(14,986) $13,122  $32,219  Earnings (loss) per share:                    Basic **$****0.97**  $0.48  $(0.60) $0.53  $1.32 Diluted **$****0.96**  $0.48  $(0.60) $0.53  $1.30 Shares used in per share calculation:                    Basic  **24,978**   24,860   24,810   24,602   24,416 Diluted  **25,369**   25,034   24,810   24,837   24,753 Total assets **$****233,222**  $206,367  $277,100  $307,141  $312,468 Shareholders’ equity **$****195,017**  $168,616  $254,014  $266,223  $251,692 Shareholders’ equity per common share **$****7.77**  $6.77  $10.23  $10.75  $10.27 
 

 
   PAGE 10 ELECTRO RENT 2005 ANNUAL REPORT**MANAGEMENT’S DISCUSSION AND ANALYSIS**The following discussion of our financial condition and results of operations should be read inconjunction with the fiscal 2005 Consolidated Financial Statements and the notes thereto and theother financial and statistical information appearing elsewhere in this annual report.**OVERVIEW**We generate revenues through the rental, lease and sale of electronic equipment, including test andmeasurement (T&M) and computer-related (DP) equipment. In fiscal 2005, 78% of rental and leaserevenues was derived from T&M equipment. This percentage has been increasing over the last fiveyears mainly as a result of the shrinking overall market for DP equipment. Also contributing tothis increase is the higher level of T&M activity in wireless telecommunications, aerospace anddefense markets. Rental revenues comprised 75% of fiscal 2005 rental and lease revenue, which iscomparable to a year ago.A significant part of our T&M equipment portfolio is rented or leased to large companies in theaerospace, defense, electronics and telecommunications industries. We believe that a large part ofour T&M equipment is used in research and development activities. We also rent equipment tocompanies of various sizes representing a cross-section of American industry.The profitability of our business also depends in significant part on controlling the timing,pricing and mix of purchases and sales of equipment. We seek to acquire new and used equipment atattractive prices for the purpose of deriving a profit from a combination of renting, leasingand/or selling such equipment. The sale of equipment, either after acquisition or after it has beenrented, can comprise a significant portion of revenues and operating profit. To maximize overallprofit from the rental, leasing, and sales of equipment, we manage our equipment pool on anon-going basis by analyzing our product strategy for each specific equipment class in light of thatequipment’s historical and projected life cycle. In doing so, we must compare our estimate ofpotential profit from rental with the potential profit from the product’s immediate sale andreplacement with new or other equipment. In our analysis, we assume depreciation and impairment ofequipment based on projected performance and historical levels, although historical trends are notnecessarily indicative of future trends. Our overall equipment management is complex and ourproduct strategy can change during a product’s lifetime based upon numerous factors, including theUS and global economy, interest rates and new product launches. Our strategic equipment decisionsare based on the following fundamentals:**•** Our acquisition cost; **•** Our estimates of current and future market demand for rentals; **•** Our estimates of current and future supply of product; **•** The book value of the product after depreciation and other impairment; **•** Our estimates of the effect of interest rates on rental and leasing fees as well as capital financing; and **•** Our estimates of the potential current and future sale prices.If we are unable to accurately predict market trends, or if demand for the equipment we supplydeclines, we can be left with large lots of inventory that we are unable to rent or sell for aprofit. We assess the carrying value of the equipment pool on a quarterly basis or when factorsindicating impairment are present. In the fourth quarter of fiscal 2005, the Company recordednon-cash impairment charges of $0.6 million resulting from low projected demand for certain rentalproducts, including general purpose and communications equipment.When the US and global economy began to rebound in fiscal 2004, we saw increased demand for ourequipment, and we were able to sell equipment that we had previously written down or that was olderand more fully depreciated. Due in part to these events, we experienced greater than normal grossmargins on equipment sales in fiscal 2005. We intend to maintain our equipment management strategy,and, accordingly, we expect that gross margins on sales will return to normal historical levels of40% to 45% as older and previously impaired equipment constitute a smaller percentage of sales.However, results for future quarters are subject to future events, as in the case of unusualopportunities for sales and early termination of equipment leases. Such early terminations can (i)result in sales proceeds to the extent that the customer decides to purchase the equipmentinvolved, (ii) accelerate lease payments to the extent of lease terminationfees, and/or (iii) to the extent the customer does not purchase the equipment, increase the pool ofequipment for lease by us, which would adversely affect future utilization unless we can rent,lease or sell that equipment to another party.
 

 
   ELECTRO RENT 2005 ANNUAL REPORT PAGE 11We measure our overall level of profitability with the following metrics:**•** Net income per diluted common share (EPS); **•** Net income as a percentage of average earning assets (AEA); and **•** Net income as a percentage of average tangible equity.On May 2, 2005 we announced that we have been awarded what we believe to be the first licensefor a wholly foreign-owned equipment rental business in China. With the license awarded by theTianjin Economic-Technological Development Area (TEDA), our wholly owned subsidiary in Tianjin,China, commenced operations in June 2005.**PROFITABILITY AND KEY BUSINESS TRENDS**In fiscal 2005, we improved profitability in each quarter, as compared to the same respectivequarter in the prior year. Lower selling, general and administrative expenses, improved grossprofit on equipment sales, and higher asset levels on rent led to this improvement.During fiscal 2005, we focused on core T&M and DP markets. Organic growth has been moderate,consistent with the economic environment. Focused, prudent growth continues to be a primary goalfor fiscal 2006.The results for fiscal 2005 were affected by several positive one-time events. The buyout of leasedequipment by one of our largest data products customers increased revenues by $3.4 million duringthe year’s third quarter, but it reduced subsequent quarterly lease revenue by $0.9 million. Incomefor the year also included $1.8 million (pre-tax) related to funds received from the settlement ofa class action lawsuit. In addition, the provision for income taxes was reduced by $2.5 million dueto changes in estimated tax liabilities and rates.Our profitability measurements are presented in the table below for the years ended May 31:               2005 2004 2003Net income (loss) per diluted share $0.96  $0.48  $(0.60)Net income (loss) as a percentage of AEA  10.4%  4.9%  (5.4%)Return on average tangible equity  12.7%  5.6%  (6.2%)T&M rental and lease activity increased consistently during fiscal 2005, reflecting thestrengthening global economy. However, DP lease demand continued to be weak, and rental and leaserates remained very competitive. The amount of equipment on rent based on acquisition cost,increased from $105.3 million at May 31, 2004, to $107.0 million at May 31, 2005. Acquisition costof equipment on lease increased from $36.4 million at May 31, 2004 to $36.6 million at May 31,2005. The overall utilization rate for our equipment pool, based on acquisition cost, decreasedfrom 62.9% at May 31, 2004, to 59.2% at May 31, 2005. This decrease reflects higher acquisitions ofT&M equipment in the current year, corresponding to the prospect of rising demand in futureperiods. During the same period, monthly rental rates increased by 11.0%, but monthly lease ratesdecreased by 2.0%.We believe that demand for rental electronic equipment should improve as the US economy continuesto recover. Also, increased defense spending on advanced weapons and intelligence systems shouldbenefit our business. While those developments continue to unfold, however, we will strive tooperate the business efficiently at the prevailing activity levels.**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**The preparation of financial statements in conformity with accounting principles generally acceptedin the United States of America (“generally accepted accounting principles”) requires management tomake estimates andassumptions that affect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements and the reported amountsof revenues and expenses during the reporting period. On a regular basis, management reviews theseestimates including those related to asset lives and depreciation methods, impairment of long-livedassets including rental and lease equipment,
 

 
   PAGE 12 ELECTRO RENT 2005 ANNUAL REPORTand allowance for doubtful accounts. These estimates are based on management’s historicalexperience and on various other assumptions believed to be reasonable under the circumstances.Actual results may differ from these estimates under different assumptions or conditions.Management believes, however, that the estimates, including those for the above-listed items, arereasonable.Management believes the following critical accounting policies affect the more significantjudgments and estimates used in the preparation of our financial statements:ASSET LIVES AND DEPRECIATION METHODS: Our primary business involves the purchase andsubsequent rental and lease of long-lived electronic equipment. Management has chosen asset livesthat it believes correspond to the economic lives of the related assets. Management has chosendepreciation methods that it believes match our benefit from the assets with the associated costs.These judgments have been made based on management’s expertise in each equipment type that wecarry. If the asset life and depreciation method chosen do not reduce the book value of the assetto at least our potential future cash flows from the asset, we would be required to record animpairment loss. For new equipment, depreciation methods and useful lives are periodically reviewedand revised as deemed appropriate.IMPAIRMENT OF LONG-LIVED ASSETS: On a quarterly basis, management reviews the carryingvalue of our rental and lease equipment to determine if the carrying value of the assets may not berecoverable due to current and forecasted economic conditions. This requires management to makeestimates related to future cash flows from the assets and to determine whether any deteriorationis temporary or permanent. If these estimates or the related assumptions change in the future,management may be required to record additional impairment charges. In the fourth quarter of fiscal2005, the Company recorded non-cash impairment charges of $0.6 million resulting from low projecteddemand for certain rental products, including general purpose and communications equipment.ALLOWANCES FOR DOUBTFUL ACCOUNTS AND EQUIPMENT LOSSES: We maintain allowances for doubtfulaccounts for estimated losses resulting from the inability of customers to pay our invoices. Wealso maintain an allowance for estimated losses resulting from the inability of customers to payfor lost equipment. These estimates are primarily based on the amount of time that has lapsed sincethe related payments were due as well as specific knowledge related to the ability of customers tomake the required payments. If the financial condition of our customers were to deteriorate,additional allowances could be required that would reduce income. Conversely, if the financialcondition of the customers were to improve or if legal remedies to collect past due amounts weremore successful than expected, the allowances for doubtful accounts and equipment losses may needto be reduced and income would be increased.INCOME TAXES: As part of the process of preparing our consolidated financial statements,management is required to estimate income taxes in each of the jurisdictions in which we operate.Significant management judgment is required in determining the provision for income taxes anddeferred tax assets and liabilities. This process involves management estimating actual current taxexposure together with assessing temporary differences resulting from differing treatment of items,such as depreciation and amortization, for tax and accounting purposes. These differences result indeferred tax assets and liabilities, which are included within our consolidated balance sheet. Wethen assess the likelihood that our deferred tax assets will be recovered. To the extent managementbelieves that recovery is not likely, we establish a valuation allowance. Management determinedthat no valuation allowance was required during the last three fiscal years.**FISCAL 2005 COMPARED WITH FISCAL 2004**TOTAL REVENUES: Total revenues for fiscal 2005 increased $13.5 million, or 14%, to $107.6million compared to $94.1 million in the prior year. The increase in total revenues was due to anincrease in rental and lease revenue of 14% and an increase in sales of equipment and otherrevenues of 15%.Rental and lease revenues in fiscal 2005 were $80.3 million, a $10.0 million increase from theprior year. This increase reflects higher demand for T&M equipment in our major market segments,which we believe stems from the generaleconomic recovery and our additional lease program offerings. However, an early termination of DPleases with one customer, as described below, resulted in a decrease in quarterly lease revenues ofapproximately $0.9 million, beginning in January 2005.
 

 
   ELECTRO RENT 2005 ANNUAL REPORT PAGE 13Sales of equipment and other revenues were $27.4 million in fiscal 2005, an increase of $3.5million as compared to fiscal 2004. This increase is due to an early lease termination and relatedbuyout transaction with one customer as of December 31, 2004, which resulted in proceeds ofapproximately $3.4 million. That amount included the fair market value of the equipment and leasetermination charges. Gross margin on sales excluding the lease termination charges increased from$9.4 million, or 44.4%, in fiscal 2004 to $11.0 million, or 52.6%, in fiscal 2005, due toimprovement in equipment market values and increases in sales of equipment that had been previouslywritten down or that was older and more fully depreciated. We expect that gross margin on saleswill return to more normal levels of 40% to 45% over the next year as older and previously impairedequipment become a smaller part of sales.DEPRECIATION OF RENTAL AND LEASE EQUIPMENT: Depreciation of equipment increased from $30.6million in fiscal 2004, to $33.4 million, in fiscal 2005. While this expense increased by $2.8million, or 9%, in fiscal 2005, depreciation as a percent of rental and lease revenues decreasedfrom 43% in fiscal 2004 to 42% in fiscal 2005. The increased depreciation expense reflects higherexpenditures for new rental and lease equipment that began in fiscal 2004, and impairment chargesof $0.6 million. The decreased ratio reflects revenues increasing in the current year at a ratehigher than depreciation expense. The acquisition cost of rental and lease equipment was $256.0million, $239.7 million and $252.7 million at May 31, 2005, 2004, and 2003, respectively.COSTS OF REVENUES OTHER THAN DEPRECIATION: Costs of revenues other than depreciationdecreased from $14.2 million in fiscal 2004 to $12.5 million in fiscal 2005. Costs of revenuesother than depreciation primarily includes the cost of equipment sales, which decreased from 56% ofequipment sales in fiscal 2004 to 47% of equipment sales in fiscal 2005. The decrease in thispercentage is generally due to a greater portion of equipment that was sold in fiscal 2005 whichwas more fully depreciated, had been previously written down, or resulted from sales of leasedequipment to leasing customers. Such sales typically result in higher margins.SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expensesdecreased $2.3 million, or 7% to $29.9 million, in fiscal 2005 as compared to $32.2 million infiscal 2004. Fiscal 2004 includes a $2.3 million accrual related to the retirement of our formercorporate president. Excluding the one-time charge, SG&A expenses were unchanged in fiscal 2005compared to the prior year. Excluding the one-time charge, these expenses as a percentage of totalrevenues decreased from 32% in fiscal 2004 to 28% in fiscal 2005.OPERATING PROFIT: As a result of the changes in revenues and operating expenses discussedabove, operating profit was $31.9 million or 30% of total revenues in fiscal 2005 compared to anoperating profit of $17.1 million or 18% of total revenues in fiscal 2004.INTEREST INCOME, NET: Net interest income of $1.5 million for fiscal 2005 increased fromthe $1.3 million recorded in the prior year, reflecting higher yields on money market investments.INCOME TAX PROVISION: The effective tax rate in fiscal 2005 was 30.9% as compared to 35.0%in the prior year. The decline in effective rate was due primarily to the release of tax reservesas a result of completed tax audits and changes in estimate in addition to the increase in taxexempt income and extra-territorial income exclusions. The reevaluation of accrued liabilitiesrelated to positions taken on federal and state returns reduced tax expense by $2.5 million ascompared to $0.7 million in the prior year. Increases in the amounts and yields of tax exemptinvestments combined with the benefits realized by extra-territorial income exclusions reducedexpense by $0.5 million as compared to $0.1 million in the prior year.**FISCAL 2004 COMPARED WITH FISCAL 2003**TOTAL REVENUES: Total revenues for fiscal 2004 decreased $14.7 million, or 13%, to $94.1million compared to $108.8 million in the prior year. The decline in total revenues was due to adecrease in rental and lease revenue of 13% and a decrease in sales of equipment and other revenuesof 15%.Rental and lease revenues in fiscal 2004 were $70.3 million, a 13% decline from the prior year.This decrease was the result of lower demand in most of our major market segments, stemming fromthe global economic slowdown duringfiscal 2003 and first half of fiscal 2004, and an excess supply of equipment on the marketavailable for customers to purchase. Additionally, DP rental revenue
 

 
   PAGE 14 ELECTRO RENT 2005 ANNUAL REPORTcontinued to be negatively impacted by eroding purchase prices of new personal computers and bycompetition. Included in rental and lease revenues for fiscal 2004 is $1.2 million from thereversal of various accounts receivable credits no longer owed to customers. There was nosignificant comparable revenue in fiscal 2003.Sales of equipment and other revenues were $23.8 million in fiscal 2004, a decrease of 15% ascompared to fiscal 2003. This decrease reflects lower demand, the smaller rental and leaseequipment pool, and increased utilization. Sales continue to occur routinely as a normal part ofour rental business; however, these sales can fluctuate from quarter to quarter and year to yeardepending on equipment availability and customer requirements and funding. Gross margin on salesincreased from $8.4 million, or 34.9%, in fiscal 2003 to $9.4 million, or 44.4%, in fiscal 2004,due to improvement in equipment market values and increases in sales of equipment that had beenpreviously written down or that was older and more fully depreciated. We expect that gross marginon sales will return to more normal levels over the next two years as older and previously impairedequipment become a smaller part of sales.DEPRECIATION OF RENTAL AND LEASE EQUIPMENT: Depreciation of equipment decreased from $44.7million in fiscal 2003, to $30.6 million, in fiscal 2004. Depreciation expense was reduced by $14.1million, or 32%, for fiscal 2004, and depreciation as a percent of rental and lease revenues alsodecreased from 55% in fiscal 2003 to 43% in fiscal 2004 despite the 13% decline in rental and leaserevenues in fiscal 2004. These declines reflect our previous write-downs and continued liquidationof under-performing assets. The acquisition cost of rental and lease equipment was $239.7 million,$252.7 million and $322.9 million at May 31, 2004, 2003, and 2002, respectively.COSTS OF REVENUES OTHER THAN DEPRECIATION: Costs of revenues other than depreciationdecreased from $17.9 million in fiscal 2003 to $14.2 million in fiscal 2004. Costs of revenuesother than depreciation primarily includes the cost of equipment sales, which decreased from 65% ofequipment sales in fiscal 2003 to 56% of equipment sales in fiscal 2004. The decrease in thispercentage is due to the fact that a larger portion of equipment sold in fiscal 2004 was more fullydepreciated, had been previously written down, or resulted from sales of leased equipment toleasing customers, which typically results in higher margins.SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expensesdecreased $5.2 million, or 14% to $32.2 million, in fiscal 2004 as compared to $37.4 million infiscal 2003. Fiscal 2004 includes a $2.3 million accrual related to the retirement of our formercorporate president. Excluding the one-time charge, SG&A expenses declined by $7.5 million, or 20%,in fiscal 2004 compared to the prior year. Excluding the one-time charge, these expenses as apercentage of total revenues decreased from 34% in fiscal 2003 to 32% in fiscal 2004. The declinein SG&A expenses is the result of continuous reductions in almost all areas of the business, withapproximately 60% of the reduction relating to reduced personnel costs.OPERATING PROFIT: As a result of the changes in revenues and operating expenses discussedabove, operating profit was $17.1 million or 18% of total revenues in fiscal 2004 compared to anoperating loss of $28.4 million or 22% of total revenues in fiscal 2003. The operating loss infiscal 2003 included the write-off of goodwill and other intangibles of $37.1 million.INTEREST INCOME, NET: Net interest income of $1.3 million for fiscal 2004 was 36% lowerthan the $2.1 million recorded in the prior year, mainly as a result of decreased investments dueto the $99.5 million special cash distribution paid to common shareholders on January 14, 2004. Inaddition, interest rates were lower in the current year.INCOME TAX PROVISION (BENEFIT): The effective tax rate was 35% for fiscal 2004 as comparedto 38% for the prior year. This rate reduction is due to the completion of certain US federal andCanadian provincial tax audits. As a result, we reevaluated our accrued liability for income taxesand reduced income tax expense by approximately $0.7 million in fiscal 2004.**LIQUIDITY AND CAPITAL RESOURCES**During the last three fiscal years, our primary capital requirements have been purchases of rentaland lease equipment. We generally purchase equipment throughout each year to replace equipment thathas been sold, and to maintain adequate levels of rental equipment to meet existing and newcustomer demands. During fiscal 2005 we experiencedincreases in both overall rental activity and rental rates. To support areas of potential growthfor both T&M and DP equipment, and to keep our equipment pool technologically up-to-date, weincreased purchases of equipment in fiscal 2005 over the previous year.
 

 
   ELECTRO RENT 2005 ANNUAL REPORT PAGE 15On January 14, 2004, we paid a special distribution of $4.00 per outstanding common share,which totaled $99.5 million. Following this distribution, cash, cash equivalents and marketablesecurities have remained relatively stable. We expect that the level of these liquid assets willbegin to increase, unless the recent increased level of equipment purchases is sustained, we decideto buy back additional shares of our common stock, pay another special distribution, pay dividends,finance another acquisition, or pursue other opportunities. We have invested our cash balance inmoney market funds and other instruments with maturities of less than 90 days.During fiscal year 2001, our Board of Directors authorized management to implement a limited stockrepurchase program in the amount of 1,500,000 shares. As of May 31, 2005, we had bought back andretired 318,000 common shares for $3.0 million, or $9.37 per share. The only shares repurchasedsince fiscal 2001 have been in connection with the stock-for-stock exercise of employee options.Shares acquired are retired.Our rental and lease equipment portfolio totaled $256.0 million, at acquisition cost, at May 31,2005, increasing $16.2 million from a year ago. During the three years ended May 31, 2005, we madepayments for equipment purchases totaling $141.6 million, while recording a net decrease in ourequipment portfolio at acquisition cost of $66.9 million resulting from the liquidation of usedequipment. We have three principal sources of liquidity: cash flows provided by our operatingactivities, proceeds from the sale of equipment from our portfolio, and external funds thathistorically have been provided by bank borrowings.During fiscal 2005 and 2004 net cash provided by operating activities was $48.2 million and $40.4million, respectively. The increase in fiscal 2005 is primarily the result of higher net income.During fiscal 2005 net cash used in investing activities was $48.0 million as compared to $64.8million in the prior year. This decrease is mostly attributable to the net sales of marketablesecurities in fiscal 2005 as compared to net purchases in the prior year, which was partiallyoffset by higher purchases of rental and lease equipment.During fiscal 2005 net cash flows provided by financing activities were $2.1 million compared to$97.4 million used in financing activities for fiscal 2004. This change primarily reflects thepayment of the special distribution in fiscal 2004 as discussed above.As the following table illustrates, cash flows from operating activities and proceeds from the saleof equipment have been more than sufficient to fund our operations during the last three years.                   Three Years          Ended          (in thousands) May 31, 2005  2005  2004  2003  Cash flows from operating activities 1 $135,219  $48,184  $40,422  $46,613 Proceeds from sale of equipment  66,042   20,944   21,093   24,005  Total  201,261   69,128   61,515   70,618 Payments for equipment purchases  (141,597)  (72,129)  (42,815)  (26,653)Net increase (decrease) in equipment portfolio atacquisition cost  (66,896)  16,219   (12,929)  (70,186) 1 For the components of cash flows from operating activities, see the ConsolidatedStatements of Cash Flows.As indicated by the table, cash flows from operating activities and proceeds from sale ofequipment provided 142% of the funds required for equipment purchased during the three-year periodended May 31, 2005. Rental and lease revenues have been significantly supplemented as a source ofcash flow by proceeds from the sale of equipment from our portfolio. Management believes that cashand cash equivalents, marketable securities, cash flows from operatingactivities, proceeds from the sale of equipment and our borrowing capacity (see Note 4 of Notes toConsolidated Financial Statements) will be sufficient to fund our operations for at least the nexttwelve months.We have a $10.0 million revolving line of credit with a bank, subject to certain restrictions, tomeet equipment acquisition needs as well as working capital and general corporate requirements. Wehad no borrowings outstanding at May 31, 2005.
 

 
   PAGE 16 ELECTRO RENT 2005 ANNUAL REPORTWe lease certain facilities under various operating leases. Most of the lease agreementsprovide us with the option of renewing the lease at the end of the initial lease term, at the fairrental value, for periods of up to five years. In most cases, management expects that in the normalcourse of business facility leases will be renewed or replaced by other leases.Inflation generally has favorably influenced our results of operations by enhancing the sale pricesof our used equipment. However, lower inflation rates and the continued availability of newer, lessexpensive equipment with similar or better specifications could result, over a period of severalyears, in lower relative sale prices for used electronic equipment. If this should occur, ourmargins and earnings will be reduced. Prices of new and used electronic test equipment have notconsistently followed the overall inflation rate. Prices of new and used personal computers andservers have consistently declined for the past three years. Because management is unable topredict the advances in technology and the rate of inflation for the next several years, it is notpossible to estimate the impact of these factors on our margins and earnings.**CONTRACTUAL OBLIGATIONS**The table below presents the amount of payments due under our contractual obligations. The tablereflects expected payments due as of May 31, 2005 and does not reflect changes that could ariseafter that time.                       Payments due by period      Less         More      than 1 1-3 3-5 than 5Contractual Obligations (in thousands) Total year years years years Facility lease payments, not includingproperty taxes and insurance $1,161  $345  $449  $324  $43 Employment agreements  149   122   27   —   —  Total $1,310  $467  $476  $324  $43  
 

 
   ELECTRO RENT 2005 ANNUAL REPORT PAGE 17**QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT INTEREST RATES AND CURRENCY RATES**We are exposed to market risks related to changes in interest rates and foreign currencyexchange rates, however, we believe those risks to be not material in relation to our operations.We do not have any derivative financial instruments.As of May 31, 2005 and 2004, our cash and cash equivalents included money market securities and wehad investments in marketable securities. Due to the short-term duration of our investmentportfolio, an immediate 10% change in interest rates would not have a material effect on the fairmarket value of our portfolio, therefore, we would not expect our operating results or cash flowsto be affected to any significant degree by the effect of a sudden change in market interest rateson our securities portfolio.We are also subject to risks associated with foreign currency rate fluctuations to the extent offinancing arrangements for rented and leased equipment denominated in Canadian dollars or euros. Wehave determined that hedging of these assets is not cost effective and instead attempt to minimizeour risks due to currency and exchange rate fluctuationsthrough working capital management. We do not believe that any foreseeable change in currency rateswould materially or adversely affect our financial position or results of operations.
 

 
   PAGE 18 ELECTRO RENT 2005 ANNUAL REPORT**SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS**Except for the historical statements and discussions contained in this Annual Report,statements contained in this Annual Report constitute forward-looking statements within the meaningof section 21E of the Securities Exchange Act of 1934. These forward-looking statements reflect thecurrent views of our management with respect to future events and financial performance; however,you should not put undue reliance on these statements. We undertake no obligation to update orrevise any forward-looking statements that are or may be affected by developments, which ourmanagement does not deem material. When used or incorporated by reference in this Annual Report,the words “anticipate,” “believes,” “expects,” “intends,” “future,” and other similar expressionsidentify forward-looking statements. These forward-looking statements are subject to certain risksand uncertainties, not all of which are disclosed in this Annual Report. We believe ourmanagement’s assumptions are reasonable; nonetheless, it is likely that at least some of theseassumptions will not come true. Accordingly, our actual results will probably differ from theoutcomes contained in any forward-looking statement, and those differences could be material.Factors that could cause or contribute to these differences include, among others, those risks anduncertainties discussed under the sections contained in this Annual Report entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” “Quantitative andQualitative Disclosure About Interest Rates and Currency Rates,” and “Risk Factors” attached asExhibit 99; our Proxy Statement for our 2005 Annual Meeting of Shareholders; and our other filingswith the Securities and Exchange Commission. Should one or more of the risks discussed, or anyother risks, materialize, or should one or more of our underlying assumptions prove incorrect, ouractual results may vary materially from those anticipated, estimated, expected or projected.
 

 
     ELECTRO RENT 2005 ANNUAL REPORT   PAGE 19**Consolidated Statements of Operations**             Year Ended May 31,          (in thousands, except per share information) 2005  2004  2003  REVENUES:            Rentals and leases $80,257  $70,268  $80,667 Sales of equipment and other revenues  27,359   23,842   28,129  Total revenues  107,616   94,110   108,796               OPERATING EXPENSES:            Depreciation of rental and lease equipment  33,365   30,559   44,733 Costs of revenues other than depreciationof rental and lease equipment  12,497   14,219   17,930 Selling, general and administrative expenses  29,869   32,207   37,399 Loss on impairment of goodwill  —   —   35,703 Loss on impairment of intangibles  —   —   1,432  Total operating expenses  75,731   76,985   137,197  Operating profit (loss)  31,885   17,125   (28,401)Interest income, net  1,476   1,335   2,091 Income from settlements  1,758   —   2,000  Income (loss) before income taxes  35,119   18,460   (24,310)Income tax provision (benefit)  10,854   6,476   (9,324) Net income (loss) $24,265  $11,984  $(14,986) Earnings (loss) per share:            Basic $0.97  $0.48  $(0.60)Diluted $0.96  $0.48  $(0.60)Shares used in per share calculation:            Basic  24,978   24,860   24,810 Diluted  25,369   25,034   24,810 The accompanying notes are an integral part of these consolidated financial statements.
 

 
     PAGE 20   ELECTRO RENT 2005 ANNUAL REPORT**Consolidated Balance Sheets**         As of May 31,       (in thousands, except share information) 2005  2004  ASSETS        Cash and cash equivalents $31,997  $29,692 Marketable securities  48,800   52,475 Accounts receivable, net of allowance for doubtful accounts of $839 and $1,157  10,548   8,095 Rental and lease equipment, net of accumulated depreciation of $133,170 and $143,403  122,798   96,346 Other property, net of accumulated depreciation and amortization of $12,131and $11,547  15,722   16,084 Other  3,357   3,675    $233,222  $206,367           LIABILITIES AND SHAREHOLDERS’ EQUITY        Liabilities:        Accounts payable $13,983  $16,560 Accrued expenses  8,700   11,000 Deferred revenue  2,768   2,197 Deferred tax liability  12,754   7,994  Total liabilities  38,205   37,751  Commitments and contingencies (Note 11)        Shareholders’ equity:        Preferred stock, $1 par — shares authorized 1,000,000; none issued        Common stock, no par — shares authorized 40,000,000; issued andoutstanding 2005 — 25,100,132; 2004 — 24,897,539  21,638   19,502 Retained earnings  173,379   149,114  Total shareholders’ equity  195,017   168,616    $233,222  $206,367  The accompanying notes are an integral part of these consolidated financial statements.
 

 
     ELECTRO RENT 2005 ANNUAL REPORT   PAGE 21**Consolidated Statements of Shareholders’ Equity**             Three years ended May 31, 2005 Common Stock      Number      Retained (in thousands) of Shares  Amount  Earnings  Balance, June 1, 2002  24,775  $13,246  $252,977 Exercise of stock options  46   242   — Tax benefit for stock options exercised  —   2,535   — Net loss for the year ended May 31, 2003  —   —   (14,986) Balance, May 31, 2003  24,821   16,023   237,991 Exercise of stock options  185   1,978   — Tax benefit for stock options exercised  —   1,599   — Repurchase of common stock  (108)  (98)  (1,346)Special distribution  —   —   (99,515)Net income for the year ended May 31, 2004  —   —   11,984  Balance, May 31, 2004  24,898   19,502   149,114 Exercise of stock options  203   1,668   — Tax benefit for stock options exercised      468   — Net income for the year ended May 31, 2005  —   —   24,265  Balance, May 31, 2005  25,101  $21,638  $173,379  The accompanying notes are an integral part of these consolidated financial statements.
 

 
     PAGE 22   ELECTRO RENT 2005 ANNUAL REPORT**Consolidated Statements of Cash Flows**             Year Ended May 31,          (in thousands) 2005  2004  2003  CASH FLOWS FROM OPERATING ACTIVITIES:            Net income (loss) $24,265  $11,984  $(14,986)Adjustments to reconcile net income (loss) to net cashprovided by operating activities:            Depreciation and amortization  34,232   31,483   46,279 Loss on impairment of goodwill  —   —   35,703 Loss on impairment of intangibles  —   —   1,432 Gain on sale of rental and lease equipment  (11,018)  (9,379)  (8,386)Deferred tax liability  4,760   4,815   (12,638)Income from settlements  (1,758)  —   (2,000)(Recapture) provision for losses on accountsreceivable  (141)  645   605 Changes in operating assets and liabilities:            Accounts receivable  (2,312)  (1,866)  4,544 Other assets  318   1,350   871 Accounts payable  (191)  1,768   (470)Accrued expenses  (542)  (742)  (3,458)Deferred revenue  571   364   (883) Net cash provided by operating activities  48,184   40,422   46,613               CASH FLOWS FROM INVESTING ACTIVITIES:            Proceeds from sale of rental and lease equipment  20,944   21,093   24,005 Payments for purchase of rental and lease equipment  (72,129)  (42,815)  (26,653)Net sales (purchases) of marketable securities  3,675   (42,475)  (10,000)Payments for purchase of other property  (505)  (599)  (917) Net cash used in investing activities  (48,015)  (64,796)  (13,565)              CASH FLOWS FROM FINANCING ACTIVITIES:            Special distribution  —   (99,515)  — Tax benefit for stock options exercised  468   1,599   2,535 Proceeds from issuance of common stock  1,668   534   242  Net cash provided by (used in) financing activities  2,136   (97,382)  2,777  Net increase (decrease) in cash and cash equivalents  2,305   (121,756)  35,825 Cash and cash equivalents at beginning of year  29,692   151,448   115,623  Cash and cash equivalents at end of year $31,997  $29,692  $151,448  The accompanying notes are an integral part of these consolidated financial statements.
 

 
     ELECTRO RENT 2005 ANNUAL REPORT   PAGE 23**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**FOR THE YEARS ENDED MAY 31, 2005, 2004 AND 2003